In an effort to contain the repercussions of a scandal involving the misuse of confidential government tax plans, PricewaterhouseCoopers (PwC) Australia has taken decisive measures. The firm has decided to sell its government consulting unit to Allegro Funds, a private equity group, and has brought in an executive from Singapore to assume leadership responsibilities within the local firm.
Here’s an overview of the key aspects surrounding the challenges faced by this prominent member of the big four professional services firms.
What Went Wrong?
The scandal revolves around a former tax partner who, between 2013 and 2018, had signed confidentiality agreements with the Australian Treasury. These agreements were meant to provide advisory services regarding policies aimed at curbing tax avoidance by multinational corporations.
In January, Australian tax authorities disclosed that these agreements had been breached. Subsequently, a collection of partially redacted internal emails was released in May during parliamentary proceedings, revealing that the confidential information had been shared among PwC staff for the purpose of generating business opportunities.
One email from 2016 showcases the elation of a PwC staff member upon securing contracts with prestigious clients, particularly notable U.S. technology companies, owing to the insider information provided by the tax partner.
In the wake of these revelations, Australia’s tax office informed parliament that it had thwarted numerous attempts by companies to undermine the 2016 Multinational Anti-Avoidance Law, resulting in annual savings of approximately A$180 million ($120 million) for taxpayers.
How Has PwC Responded?
In response to the incident, the Australian Treasury referred the matter to the police last month. Furthermore, the Reserve Bank of Australia, several government departments, and the country’s three largest pension funds have either suspended or reassessed their relationships with PwC.
Expressing remorse for the unauthorized sharing of confidential government tax policy information, PwC issued an apology. The firm also placed nine partners on leave and identified four former partners directly involved in the breach. Of these four, two have publicly denied any wrongdoing, and all four had already departed the firm.
To rebuild trust with its public sector clients, PwC agreed in May to establish a separate board and isolate its government consulting business. However, on Monday, interim head Kristin Stubbins admitted that this action fell short of expectations. Consequently, the firm has made the decision to divest its government consulting business to Allegro Funds, a private equity group, for A$1 ($0.67).
How Will the Separation Unfold?
Allegro Funds, founded in 2004, has carved out a niche in the Australian market as a proficient corporate turnaround specialist, managing assets worth A$4 billion. In May, the firm made its initial foray into the Australian public market by acquiring law firm Slater & Gordon for A$150 million, inclusive of debt. Additionally, Allegro Funds recently divested its ownership stake in Pizza Hut Australia, a company it had possessed since 2016.
By purchasing PwC Australia’s government consulting business, Allegro Funds will transform the unit from a division owned by a global partnership into a standalone local corporation. The new business will be launched with the financial backing provided by Allegro, and ownership will be shared between the firm and the former PwC partners.
What Risks Does PwC Face?
Following the separation, PwC will have to cope without a practice that contributes around 20% of its fiscal 2023 revenue. Assuming this year’s revenues resemble the A$3 billion earned in fiscal 2022, the impact could amount to a substantial A$600 million loss.
The remaining practices, including audit, tax, and private sector consulting, will need to embark on
an arduous journey to regain trust with their clients. Nonetheless, the Labor senator overseeing the federal inquiry cautioned PwC against using this event as an opportunity for reinvention.
There is also a looming risk of staff attrition. Professor Rahat Munir, the head of the Department of Accounting and Corporate Governance at Macquarie University, anticipates that employees will eagerly seize alternative prospects to rebrand themselves in the aftermath of this scandal.
PwC declined to provide any comment regarding this story.
($1 = 1.4997 Australian dollars)
